Jan. 23 (Bloomberg) -- New Yorkers Paul and Angelica
Kashman, declared in default on their mortgage in July 2010 and
foreclosed on by Wells Fargo & Co. in February 2011, say they
aren’t deadbeats.

“We always knew that when we get into a court of law and
show that we have all the information and backup, the truth will
come out,” said Paul Kashman, 37, a manager in the hospitality
industry. The couple, stuck in limbo by legal bureaucracy, says
they were mistakenly pushed into foreclosure, and are eager now
to save their home, using court mediation.

Their case is among 72,000 pending in the New York system,
accounting for a quarter of the civil caseload, and highlighting
the strength and weakness of the state foreclosure process.
While borrowers have protections unavailable in many other
states, it takes more than 1,000 days for banks to repossess a
home, stalling a housing recovery by keeping pressure on values
for years to come as a constant drip of distressed properties
enter the sales market.

The New York area was one of only two in the country to
post year-over-year home price declines in the latest Case-Shiller 20-city index. Homebuyers also could lose, with the
Federal Housing Finance Agency considering a fee increase to
compensate Fannie Mae and Freddie Mac for doing business in New
York and four other states with slow, costly foreclosures.

“New York suffers from what appears to be altruism, in
that it postpones foreclosures as long as possible -- the
problem is that altruism can be expensive,” said Anthony B.
Sanders, an economics professor at George Mason University in
Fairfax, Virginia. “It slows down the housing market and it
results in lenders being almost unwilling to lend. New buyers
will pay the price for this.”

Pending Foreclosures

New York’s pending foreclosures are more than a quarter of
its civil caseload, according to a 2012 report from the state’s
chief administrator of the courts. New York requires lenders and
borrowers to come to the bargaining table to work out modified
payments or other foreclosure alternatives before a case can
move to litigation. The average age of a case in the settlement
program was 15 months old and the courts oversaw an estimated
77,000 settlement conferences in 2012.

It’s one of five judicial foreclosure states, including New
Jersey, Connecticut, Florida and Illinois, in which home
repossessions require court review that the FHFA is targeting.
The agency has said it’s seeking to compensate Fannie Mae and
Freddie Mac by bringing their pricing of risk more in line with
how private lenders operate. The FHFA last year had the two
government-controlled companies almost double the annual fees
they charge for guaranteeing mortgage bonds, with increases
averaging 0.2 percentage point.

DeMarco Argues

It’s considering imposing one-time upfront fees in the five
states of between 0.15 percent and 0.3 percent of the loan
amount. The average cost per day to carry foreclosures in New
York is 112 percent of the national average, according to an
analysis by the agency.

“If those states were to adjust their laws and
requirements sufficiently to move their foreclosure timelines
and costs more in line with the national average, the state-level, risk-based fees imposed under the planned approach would
be lowered or eliminated,” Edward J. DeMarco, the agency’s
acting director, wrote in a September notice on the proposal.
“Unusual costs associated with practices outside of the norm in
the rest of the country should be borne by the citizens of that
particular state,” he wrote.

The agency, which will announce its decision as soon as
April, is pressuring states to speed up the process by removing
safeguards for homeowners, New York’s state bank regulator said
in a Nov. 26 letter to DeMarco opposing the plan.

Perverse Incentive

“The proposal would create the perverse incentive that
states should either give up the fight against mortgage fraud
and roll back consumer protections or face the consequences of
higher mortgage rates for consumers,” Benjamin Lawsky,
superintendent of the New York Department of Financial Services,
wrote in the letter. “The proposal would also shift the cost of
the failures of lenders and servicers onto New York State
borrowers.”

For the Kashmans, who live with their two children in the
two-bedroom brick row home in Brooklyn’s Dyker Heights
neighborhood that they bought for $368,000 in 2003, the clogged
foreclosure system has allowed them to stay in their home, even
as it delayed resolution of their case.

Modification Payments

They defaulted in 2010 after cutting their monthly payments
to Wells Fargo based on a modification agreement they said they
signed and returned. The bank later said it never received the
documents, so considered the lowered payments a default. The
bank for years prevented the case from entering mediation,
adding it to the backlog of thousands of inactive lawsuits
across the state, according to Aaron Jacobs-Smith, a staff
attorney at MFY Legal Services Inc. who represents the Kashmans.

Wells Fargo offered a permanent modification to the
Kashmans on Jan. 17, the Kashmans said. The couple, who said
they haven’t decided whether to accept, recently began meeting
with bank representatives as part of a pilot program in
Brooklyn’s Kings County that allows willing homeowners to begin
settlement talks in stalled lawsuits.

Outside of the court’s oversight, the Kashmans’
negotiations with Wells Fargo have been a bureaucratic carousel,
requiring them to continually resend documents they had
previously faxed, according to Jacobs-Smith. While the couple
said they successfully completed three trial payment plans, the
mortgage servicer didn’t convert any of them into permanent
modifications.

Judicial Intervention

They’ve been considering filing a request for judicial
intervention by paying a $95 fee to reanimate the case that has
languished since it was filed in early 2011, Jacobs-Smith said.

Tom Goyda, a spokesman for San Francisco-based Wells Fargo,
said the bank didn’t advance the Kashmans’ case while it was
working through modification options for them.

“The important thing is still that we were able to
identify an option that should allow the Kashmans to stay in the
home and end the foreclosure process,” Goyda said in an e-mail.

The Kashmans are part of New York’s so-called shadow-docket, which includes about 6,000 inactive filings in Brooklyn
and Queens alone. Plaintiff attorneys stopped pushing their
cases forward into the formal court docket after an October 2010
rule required them to personally vouch for the accuracy of their
mortgage servicer clients’ documentation.

State attorneys general across the U.S. had just began
investigating allegations that mortgage servicers hired workers
to sign thousands of foreclosure documents they didn’t verify or
even read. They reached a $25 billion settlement in February
with the top five banks over the practice known as robosigning.

Judicial States

Foreclosures, which slowed after the investigations, are
picking back up in judicial states such as New York and New
Jersey. While foreclosure starts declined 11 percent in December
from a year earlier in the U.S., they jumped 35 percent in New
York, which had the fourth biggest percentage increase behind
New Jersey, Pennsylvania and Kentucky, according to data
provider RealtyTrac.

While the courts are taking action to clear the backlog,
speed isn’t the only priority, said Judge Judy Harris Kluger,
chief of policy and planning for the New York State courts.

“I like efficiency as much as everybody else but it is not
going to drive everything we do,” Kluger said. “Just because
it’s efficient doesn’t mean it’s fair or right.”

Settlement Conferences

In New York, court-appointed referees preside over
settlement conferences, setting deadlines for providing and
evaluating modification applications and documents and following
up to see both sides meet them. While more homeowners should
receive loan workouts, many are unemployed or too far behind on
payments to qualify, she said.

Since April, about 60 percent of the 5,553 cases that
completed mediation moved into litigation. Borrowers received
modifications in 653 of the cases, and about 400 borrowers were
approved for short sales, where the borrower sells a property
for less than is owed, or another foreclosure alternative,
Kluger said.

Litigation can add a few more years to the process, said
Schuyler Kraus, a partner in the New York office of Hinshaw &
Culbertson who represents mortgage servicers in contested
foreclosures.

“The courts are backlogged,” Kraus said. “There are a
lot of parties who have a lot of different motivations and needs
and it’s just ended up as a morass.”

Time Consuming

While litigation is time consuming, it’s often where
homeowners find the best resolution, said Bruce Richardson, a
Manhattan-based foreclosure defense attorney. A Brooklyn man
Richardson represents remains in his house six years after going
into foreclosure and two years after the bank acquired it, he
said. Richardson is now battling to overturn the sheriff sale in
the appellate division.

“The byproduct of an aggressive and zealous defense is
that the homeowner gets to stay in the home much longer than
they otherwise could have and actually gets to keep his home,”
Richardson said.

In New York it took 1,089 days on average to foreclose in
the fourth quarter, the longest of any state and more than five
times the pace in hard-hit Arizona, a non-judicial state that
has worked through much of its backlog, according to data from
RealtyTrac.

Arizona Prices

While the housing bust was deeper in Arizona than New York,
distressed inventory is drying up there as investors purchase
foreclosed properties and convert them into rentals. U.S. home
prices climbed 5.6 percent in the 12 months through November,
according to figures released today by the FHFA. The 12-month
advance was led by a 15 percent jump in the region that includes
Arizona, Nevada and Colorado. The smallest gain was in the area
that includes New York, New Jersey and Pennsylvania, where
values rose 0.5 percent.

Speed isn’t the best way to judge the effectiveness of a
state’s foreclosure process, said Diane Thompson, attorney with
the National Consumer Law Center based in Boston.

“It’s also a question of what kind of system of justice we
want in this country,” Thompson said. “It’s much faster to
execute everybody that the police thought was guilty of a crime.
It’s faster, more efficient and would probably reduce the
overall level of crime. But as a society we don’t think that’s
an appropriate exercise of judicial authority.”

Lenders in Arizona can auction a borrower’s home as soon as
91 days after filing a notice of trustee sale. Borrowers often
have little time or leverage to challenge lenders who improperly
reject them for modifications and may never know whether the
lender has standing to seize the home because it doesn’t have to
prove it owns the loan, Beverly B. Parker, manager of the
consumer housing and public benefits unit at Southern Arizona
Legal Aid based in Tucson, said.

“Yes, it’s a much faster process here,” Parker said.
“But there has to be a balance. You can’t give all the
ammunition to one side and assume they’ll use it right. They
don’t.”